Editor’s note: this is part of an NRTA series regarding “hidden” lease costs. The introduction can be found here.
Common Area Maintenance (“CAM”) can encompass a wide variety of expenses, and some of these may require a careful examination. These costs can fluctuate depending on current conditions, and often increase depending on events within the past few years. When reviewing your lease, you should keep an eye out for any artificially high CAM costs.
Recently, unusually high growth in foreign markets like Asia has started to push commodity prices like oil, steel, lumber, and other construction materials upwards. This says nothing of the changes brought about by COVID and other recent natural disasters, which continue to spike those prices. This could potentially impact CAM costs as contractors and other service providers see the increased cost of materials and are forced to increase their charges.
At this time, you are most likely going to see an increase in CAM costs for this year. While you should keep this in mind as you receive your billings from your landlords, do not assume that it is the only reason for an increase. Even if your landlord pushes the blame on COVID, take the time to review the items anyway. You may see some other costs that cannot be attributed to the economic landscape.
To begin with, you should review and understand the impacts of tenancy levels on the pro rata share of CAM. Pay close attention to the definition of the denominator in the pro rata share calculator: is it “leased,” “leasable,” “occupied,” or “existing” floor area or building space? These subtle word choices can result in significant differences in what you should be paying as your pro rata share. In the event of the “leased” or “occupied” language, it’s essential that you ask the landlord to provide support for their denominator. Remember that every square foot counts when you are dealing with these definitions, so be sure to understand what is included and what is excluded.
The other area where vacancies may impact CAM costs is in service levels. A parking lot could be left alone or have reduced service when it is time to bring the snow plows out. This, of course, will vary by center, so it is important to understand the specific layout. That includes access roads, ring roads, traffic flow, and parking fields.
On the other hand, if a now vacant tenant had been maintaining their own lot for snow plowing, cleaning, or lawn maintenance, you may see an increase in costs incurred by the landlord. This is where you need to understand the definition of common areas. Again, you are looking for equity in your lease, so that is your deal with the landlord. Most of the time, you don’t need to care about the deal that the landlord made with other tenants. You just have to make sure that the landlord is not penalizing you. This thought should be considered in the event the landlord is required to start maintaining land that was left vacant by a tenant closing down shop.
The true impact of these hidden expenses is not always as easy to catch as our previous examples. There are certain costs that might only be caught in a detailed review of the CAM billing and its documentation. For those who are entitled to obtain a copy of the supporting documents from the landlord, we recommend that you make that request. You will want to search for items that appear out of place and costs that would not have been incurred if a space had not gone empty during the pandemic.
Here are some areas to consider:
- Utilities: Look for new accounts or accounts that did not exist in the prior year. This could be vacant space.
- Snow removal, lot sweeping/cleaning, and lawn care: Pay attention to increases in service – is the landlord now servicing a land that was previously serviced by a tenant but is now gone?
- Trash, refuse, and garbage: There may be large, one-time expenditures that could be related to cleaning out a vacant storeroom. These costs may be pricey for stores that require extensive work to clean such as grocers and auto part stores.
- Repairs and maintenance: Landlords may incur costs when boarding up a vacant storeroom or making repairs caused by a tenant moving out.
- Janitorial and cleaning costs: Routine cleanings have drastically increased because of COVID-19 regulations, so those costs will add up.
- Security costs: These could cover after-hours patrolling, emptying out a storeroom, or going out of business sales.
- Roof and structure: Damage caused by an earlier tenant could necessitate repairs or capital expenses.
- Administrative costs: Some closures will result in fines and other fees for the landlord on behalf of a vacated tenant.
- Leasing expenses: A landlord will want to get vacant space on the market, so marketing and leasing materials could incur costs.
- Management fee: If you are asked to pay a management fee, understand how it is calculated, and determine if it will be impacted by a vacancy or closure.